Bank Liquidity Provision and Basel Liquidity Regulations

Abstract

We examine liquidity creation per unit of assets by banks subject to the Liquidity Coverage Ratio (LCR) using the liquidity measures Liquidity Mismatch Index (LMI) (Bai et al., 2018) and BB (Berger and Bouwman, 2009). We identify the LCR effects through time and cross-section effects, specific LCR-constrained balance sheet categories, an economically similar asset pair with different LCR weights, and the differential implementation of LCR by the very large and less-large LCR banks. We find that, since 2013, there has been reduced liquidity creation by LCR banks compared to non-LCR banks, occurring mostly through greater holdings of liquid assets and lower holdings of illiquid assets. Trends in liquid asset holdings are driven by High Quality Liquid Assets (HQLA), an LCR-defined category, particularly for assets where market and LCR liquidity weights are most similar. Of particular interest is a post-LCR shift in LCR bank portfolios to GNMA MBS rather than GSE MBS, economically similar assets with different LCR weights, that is not attributable to relatively greater issuances or relative price effects. We also find sharper declines of commercial and residential real estate loans by LCR banks relative to non-LCR banks post-2013. Finally, we find a decline in the high runoff category of LCR liabilities for LCR banks relative to non-LCR banks post-2013 for the largest LCR banks with greater than $250 billion in assets. Our results highlight the trade-off between lower liquidity creation and lower run risk from reduced liquidity mismatch of the largest banks.

On regulation and excess reserves: The case of Basel III

“…Other risk‐based capital requirements as well as the supplementary leverage ratio were being implemented during this time, too. Given that Roberts et al (2018) and Rezende et al (2021) find that Basel III liquidity regulations may have spurred holdings of HQLA, we cannot rule out that the LCR may also explain part of the rise in excess reserves toward the end of the sample. We close with a simple numerical comparison of treatment effects at various points during the phasing in of US Basel III regulations summarized in Table 7.…”

The Influence of Liquidity Information on Liquidity Holdings in the Banking System

“…In contrast, I find that non-disclosing banks that learned more from the LCR disclosure did not reduce liquid asset holdings (relative to those that learned less) after the minimum LCR rule adoption dates, but they did reduce liquidity after the LCR regulation was first announced. This suggests that the increase in disclosing banks' liquidity was anticipated when the rule was announced, and that non-disclosing banks reacted before the rule adoption (Roberts, Sarkar, and Shachar, 2019, find similar result).…”

Determinants of banks’ liquidity: A French perspective on interactions between market and regulatory requirements

“…However, empirically, most of studies focus on proxies of the regulatory liquidity ratios, such as deposits over loans ratio for Tabak et al (2010), due to constraints on data confidentiality and availability. Among others, Roberts et al (2018) use a Liquidity Mismatch Index to show evidence of reduced liquidity creation from banks that enforced the Liquidity Coverage Ratio.…”